"Invest in what you know." - Peter Lynch
Are you looking for a self-directed IRA custodian or administrator?
Maybe you just learned about self directed IRAs and you are looking for a company to provide custody for your self-directed IRA.
...Or perhaps you already have a self directed IRA and are not happy with your custodian's performance or service.
Whatever your reason for searching for a self directed IRA custodian or administrator, this article will provide you with a better understanding of self-directed IRA custodians and how they work. It will also help you assess which custodian is the best fit for your investment needs... Intrigued?
First, I need to start out by acknowledging a very important fact...
The process of choosing a self-directed IRA custodian can be challenging.
There are a lot of things to consider when choosing a self directed IRA custodian. It is not as easy as just looking at the fees and choosing a company based on who has the lowest fees. You may have done that with your traditional discount broker, but you will find out shortly that this is not a suitable approach for finding the best self directed IRA custodian.
What can make this process more challenging is that while you are trying to find the most suitable custodian for your investing needs, you may come across some confusing industry jargon. If you don't understand what a term means it will make your job even harder. The financial services industry has not done much to correct this problem.
If you need additional clarification for industry terms, we have additional resources to help you out.
Another problem that self-directed IRA investors have is that there is not a lot of reliable information on each custodian or administrator. If you are trying to research a company, you would expect that you could find information on that company that answers your questions. This is also not the case. (we have resources below that address this need as well)
Lastly, if you contact a self-directed IRA custodian or administrator for further consideration, what questions should you ask them to get the answers you need?
As you could probably guess, that is the title of this resource. We give you 28 smart questions you can ask a self-directed IRA custodian to get the answers you need to make a smart decision.
The point of this resource is to make things easier for you. We address all three of these considerations... We cut through all the fluff and make it easy for you to make a smart decision about your retirement savings... We provide you with 28 essential questions to ask when you are choosing a self directed IRA custodian. Awesome right?
Before we get to the essential questions, let’s start off by defining what we are talking about...
What is a Self-Directed IRA Custodian?
A self-directed IRA custodian is a company that provides custody or safekeeping for investments held in your self-directed IRA. If you already have an IRA account, your custodian is most likely the same company printed on your monthly IRA account statements. Custodians are most commonly banks, trust companies, or credit unions.
In addition to custody services, self-directed IRA custodians can also provide administrative services such as: tax reporting, account access, periodic statements, document processing and storage, fund accounting, maintaining cash balances, processing foreign exchange transactions, arraigning the purchase and sales of securities or currencies, providing legal, compliance, and tax support services. The types of services available at each custodian will vary.
The term "self-directed IRA" custodian is meant to describe a custodian that will provide custody services to investors looking to hold alternative investments in their self-directed IRA account. While a number of custodians specialize in providing custody for alternative investments, there are a lot more which do not. If the custodian you are considering for your alternative investments does not specialize in providing custody for alternative investments, then you should reconsider the choice and continue your search. I explain more about why this is important below.
Why Do You Need a Self Directed IRA Custodian?
The US Internal Revenue Code (IRC) requires that your IRA is held by a "qualified custodian". If your IRA is not held by a qualified custodian, then you could be creating a prohibited transaction and causing significant tax consequences to your retirement account. Always verify that the company you are using is a qualified custodian before you transfer your accounts. If you are unsure, you can contact the company or their regulatory agency for more information.
Self Directed IRA Custodians are chartered, licensed, and regulated by governmental agencies. Some examples of these agencies are: Office of the Comptroller of the Currency (OCC), Office of Thrift Supervision (OTC), and the various state agencies which oversee banking, or trust activities. If you want to know which agency regulates a self-directed IRA custodian you are considering, you can find the information here on our self directed IRA custodian reviews page.
Should You Choose a Self Directed IRA Custodian or a Self Directed IRA Administrator?
One of the most common questions I hear is, "Should I use a self directed IRA custodian or a self directed IRA administrator?"
Unfortunately, this can be a difficult question to answer.
I have found that most of these companies are transparent about their role, but not all of them. Also many of them are not transparent about why the investor needs to know the difference between custodians and administrators.
Each of them provides similar services to self-directed IRA account owners, so which should you choose?
Self Directed IRA Custodians
Lets start off with what is required by the Internal Revenue Code (IRC). The IRC requires that IRA account owners have their IRA held at a qualified custodian. An example of a qualified custodian would be a bank, credit union or trust company. Your local savings bank is probably a qualified custodian.
Each of these custodians must adhere to banking regulations set out by governmental agencies. While people have varying opinions about the banking industry, but one thing is clear, banking regulations are quite strict. They are meant to create sound financial institutions and protect the funds of their depositors.
Many of the self directed IRA custodians meet the standards of a qualified custodian and could provide custody for your retirement account. Finding a custodian is one requirement, but someone would have to administer your IRA account for you. This is not a job you are allowed to do yourself. Many of the self-directed IRA custodians will also provide administrative services for your IRA account. They combine these two services into one for their customers. By using a self-directed IRA custodian that provides both custody and administrative services, your basic needs should be met.
Self Directed IRA Administrators
Self Directed IRA Administrators have a different model that they use for working with self-directed IRAs. Self-directed IRA administrators do not directly provide custody for self-directed IRAs. Their solution to providing self-directed IRA services is different from the custodians. The administrators will find a qualified custodian who will provide custody for their clients’ accounts, then the administrator will provide administrative services for that self directed IRA account. The client’s needs are still being met for the IRA account. The only difference is that there is a visible separation between the custodian and the administrator at the company level. Regardless of which type of company you choose, you should make sure that your funds are ultimately being held at a qualified custodian.
Administrators do not need to adhere to banking regulations since they are not regulated by them. However, the custodians they use would be. The administrators require their customers to sign contracts, so they would be bound by contract law, not banking law. This is a subtle difference, but you should understand it in case there is ever a problem with the company you have chosen.
Which is better, a self-directed IRA custodian or administrator? I'm not sure that there is a simple answer for this. Each provides a valuable service to self-directed IRA investors, they just provide different solutions. The more important question is can you find a self-directed IRA custodian or administrator that meets your needs as an investor.
Update: A number of self-directed IRA administrators are currently converting their companies from an administrator to a custodian due to changing regulations.
If you want to learn more about finding the best self-directed IRA custodian or administrator for your needs, click on the button below. We have created a simple step-by-step road map to help you make the choice easier.
What Should I Expect From My Self Directed IRA Custodian?
A self-directed IRA custodian can provide you with a number of helpful services. However, there are a number of services you should not expect them to provide. If you need assistance in any of these areas, please seek help from a legal, tax or financial advisor. You will find a nationwide list of advisors here.
Do Not expect a self-directed IRA custodian to provide assistance in the following areas:
- Provide you with financial advice - You might think they are providing you with advice, but most of these custodians are not licensed to provide financial advice. They can tell you if the investment is acceptable to be held in custody at their firm based on their standards, but this does not mean it is acceptable by the IRS standards or if it is a good investment for you. You should not rely on them for financial advice.
- Provide you with an annual valuation - Each year you are required to have a qualified appraisal on each of your alternative investments. This is frequently an overlooked requirement with self-directed IRAs. Do not expect your custodian to do this for you. They should process the valuation you provide to them, but you will have to get the actual valuation yourself.
- Provide you with an opinion about whether an investment is a prohibited transaction - (This is Important) Custodians are allowed to tell their clients if an investment is acceptable (i.e. It meets the company's standard of what is acceptable) to be held in an IRA at this company, but this does not mean that the investment is acceptable by IRS standards. If you are expecting them to tell you if your investment meets the IRS standards, don't. If you need advice about whether an investment is acceptable to the IRS, you should consult an attorney, accountant or financial advisor that specializes in self-directed IRAs. These professionals can provide you with their professional opinion about whether your investment meets the requirements.
- Provide due diligence on your investment - The custodian is not a financial advisor. They will not tell you if the investment is a good or bad investment. Don't rely on the custodian to do your research for you. This is your job and the job of your financial advisor.
- Manage your investment - Self-directed IRA custodians do not manage investments. This is the job for your financial advisor. The custodian's job is to facilitate the transactions in your IRA, and administer documents associated with managing the investment. They are not going to contact the investment sponsor, manage your bookkeeping, or call the plumber when a pipe breaks. Make sure you have a plan in place to handle these types of issues if they could potentially impact your investment.
What Should I Look For in a Self Directed IRA Custodian?
Self-directed IRA custodians provide a valuable service to IRA investors. However, every investor's needs are different. The investor who is using his retirement funds to invest in horses has different needs than the investor who is investing in single family rental real estate. The investor who is quickly buying and selling domain names a 10-20 times a month has different needs than the investor who is buying physical gold coins to hold onto for the next 20 years. Each of these needs may require a different custodian or administrator that is best suited for those needs.
When you are considering a new self-directed IRA custodian, you should research certain criteria to make sure they are a good fit for your needs. These four criteria summarize what you will want to know before you open up an account at one of these companies.
- Specialization - Each custodian has a list of asset types that they will provide custody for. Make sure your asset is on their list. Just because the Internal Revenue Code allows an asset to be held in an IRA, does not mean the custodian must allow it. Ideally, you want to find a custodian that specializes your prospective asset or at least it should be one of the most popular assets held at their company. You can be sure that if they specialize in this asset, they will be well equip to handle the idiosyncrasies of that type of investment. You should focus on companies that have a high level of competency handling the asset you are considering.
- Transaction frequency - The frequency of transactions can have a large impact on your performance if your account fees do not compliment your investment strategy (e.g. Your custodian's fee schedule is transaction-based and your investment strategy entails frequent transactions). Also, you will want to make sure that the custodian has a quick turnaround time. Having your transaction fall apart due to the slow nature of your custodian's investment review team is not something you want to experience first hand. Make sure they are prompt and responsive to your needs.
- Custodian Fees - Fees are an important part of any investor's decision-making process. High fees can turn a profitable investment into an unprofitable one rather quickly. Self-directed IRA custodians tend to have high fees compared to traditional custodians that handle traditional investments (e.g. stocks, bonds, and mutual funds). However, this is due to the types of custody they are providing their clients and it epitomizes the self-directed IRA industry as a whole. Manually processing alternative investments requires more personal attention than simply buying mutual funds via an automated system. Make sure that you know how these fee schedules will impact your proposed investment strategy.
- Customer Service - Service is important to your retirement investing. It is also one of the most overlooked aspects in the decision-making process. Coco Chanel once said, "If a woman is poorly dressed, you notice her dress, and if she's impeccably dressed, you notice the woman." You don't want to "notice" the service when you are working with a custodian. You want your experience to be seamless. High-quality customer service is hard to determine from a superficial review, but there are a few metrics you can look at to make a reasonable determination. We cover some of these in our 28 questions below.
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Where Can I Find a List of Self Directed IRA Custodians?
There are many IRA custodians in the US. Whether you have an IRA at a bank that is holding your CDs, or a brokerage account holding your stocks and mutual funds, or a custodian holding your tax liens, you are using a qualified custodian. There is no simple way to find all of these custodians. There are around 7,000 banks and trust companies in the US, so finding the right one with no guidance would be challenging.
Some of these custodians provide custody for alternative investments, but many do not. How can you figure out which ones provide the services you need?
In order to address this need, we have created, The Ultimate List of Self Directed IRA Custodians and Administrators.This list contains every self-directed IRA custodian and administrator that specializes in alternative investments. You can be sure that the companies on this list specialize in alternative investments because we have done extensive due diligence on each one. Click on the green button below to access the custodian list.
We have compiled a due diligence report for each custodian and administrator that specializes in alternative investments held in self directed IRAs. This report is called the Ultimate Insider's Guide to Self Directed IRA Custodians and Administrators. Click the blue button below to learn more about how to access this information.
Where Can I Find More Information About Self Directed IRA Custodians and Administrators?
The information contained in our detailed due diligence reports is surprisingly hard to come by. It has taken us years to compile this information. Prior to this, we have been using this information exclusively for our advisory clients. Due to some recent technological innovations, we have been able to aggregate the due diligence information in these reports to help other investors and licensed professionals make better choices about their retirement investments.
Here is a list of resources we have created for self-directed IRA investors and their advisors to use to find the best self-directed IRA custodian or administrator for their needs.
Self Directed IRA Custodian and Administrator Resources:
- Quick Start Guide to Self Directed IRAs - A step-by-step guide that maps out the process of investing with your self directed IRA. Great for novice self-directed IRA investors.
- The Ultimate List of Self Directed IRA Custodians and Administrators - This complete list of self directed IRA custodians and administrators will provide you with a list of custodians that specialize in providing custody for alternative investments. Each company on this list has a more detailed profile associated with it for further research.
- The Ultimate Insider's Guide to Self Directed IRA Custodians and Administrators - This is a complete resource for self directed IRA investors who want the most accurate information on custodians and administrators.
- The Ultimate Due Diligence Guide to Self Directed IRA Custodians and Administrators - This is the institutional version of our resources. This is only for institutions and advisors.
Now that you know what is important, these 28 questions should give you more insight into how to research each potential self-directed IRA custodian.
28 Smart Questions To Ask Your Self Directed IRA Custodian or Administrator
When investors are looking for a new self-directed IRA custodian, rarely do they contact the custodian directly to ask probing questions about the company. When they do, most of the questions are superficial in nature. Questions like, "Can you provide custody for (a specific investment) that I am looking to invest in?" or "Do you have good customer service?"
I have yet to find a company who openly admits that they have horrible service, so it is unrealistic that the question will provide any meaningful answers.
If you want information that can provide you with insight into whether the company is a good fit for you, you need to ask questions around the answer you are looking to get. For example, if you are looking to find out if a company has good customer service, don't ask the question directly. Instead, ask how many people they have on their service team, or how many complaints they have about their service. You are much more likely to get a straight answer if you dance around the question than to ask it directly.
These 28 questions can be separated into two categories. Questions that are of primary importance and questions that are of secondary importance.
Primary Importance - Questions that as essential to the decision making process. An example of this is, you want to set up a SEP IRA. It is of primary importance that the company you choose offers a SEP IRA account option, or they cannot satisfy your needs.
Secondary Importance - These questions are important, but not essential to the decision making process. For example, let's say you are looking for a custodian that is located in the state of Maine. Currently, there is no custodian with offices in the state of Maine, so you would have to consider other criteria.
Are You a Self Directed IRA Custodian or Administrator?
Are you using a custodian or administrator with your self directed IRA? #selfdirectediracustodian
This might seem like a simple question, but many people don't understand the difference between the two. The Internal Revenue Code requires that an IRA is held at a qualified custodian. As long as the self-directed IRA custodian you are using fits this criteria, then you will have met this requirement. However, someone still needs to administer your IRA for you. This is where the distinction between administrators and custodians comes in.
Our list of self directed IRA custodians and administrators is divided into custodians and administrators. There are currently over 45+ companies that provide custody and administrative services to self directed IRAs.
As long as the Internal Revenue Code criteria are met, you can choose either a self-directed IRA custodian or administrator for your self-directed IRA. Either type should be sufficient for your needs.
See our explanation of self directed IRA custodians and administrators above for more information
Who Is The Qualified Custodian That Will Be Providing Custody For My Self Directed IRA?
The Internal Revenue Code requires that Individual Retirement Accounts (IRAs) are held at a qualified custodian. If the IRA is not held at one of these institutions, then you may have created a prohibited transaction. This is a very important question to ask. It is of primary importance that your retirement account is held at a custodian, who it is held with is secondary.
Is Providing Custody or Administrative Services Your Primary Line of Business?
Would your go to an attorney that specializes in real estate to do your estate planning? Would you open an account at a retail bank to trade stocks? Maybe. But most people would choose a firm that specializes in the area they need help in. Firms that specialize in a niche tend to offer better services in that niche.
If a company is providing self-directed IRA services, then they should be proficient at this task. You don't want to choose a custodian only to find out that they cannot process your request because they have never done it before. Also if you are using a company that is not as active with self-directed IRAs, this might result in slower service, mistakes or errors due to a lack of knowledge to handle your request.
Most companies on our list of self-directed IRA custodians and administrators do have self-directed IRA custody or administrative services as their primary line of business.
How Much Experience Does Your Company Have With Self Directed IRAs?
How much experience does your company have with self directed IRAs? #selfdirectediracustodian
IRAs have been around for over 40 years, how long has this company been around? Having knowledge is one thing, having experience is something else. You want to make sure the service team for the company you are considering has experience. You will be working directly with the service team, so you will want to make sure you are getting accurate information. Do the company service people have industry designations (CISP or SDIP)? How knowledgeable are they? Industry designations are not essential, but they do show a level of commitment to learning about the industry they work in and a level of competence of the information they studied.
Is Your Self Directed IRA Custodian or Administrator Regulated? How Frequently? By Who?
Any time you entrust your retirement savings to a company, you want to make sure that company has a regulatory body that keeps them compliant by providing oversight. Broker-Dealers are regulated by FINRA, Registered Investment Advisors (RIAs) are regulated by the SEC (or state regulators), Banks are regulated by the OCC (or a state regulator), and licensed professionals are regulated by state licensing boards or trade associations.
This oversight is important because it provides a layer of protection for investors. It shows that someone is watching over the company to make sure they follow certain protocol. This may not provide absolute security over your accounts, but it will provide some protection.
Most states do not require oversight of administrators. However, if the administrators are using a qualified custodian, the custodian ultimately holds the responsibility, so the custodian would be providing some oversight on your account. Make sure you ask who their regulator is and how frequently they are audited by that regulator.
When Is The Last Time Your Firm Was Audited By a Regulator?
An independent third-party audit is another way to ensure the company is acting appropriately with your retirement funds. Just like with regulatory agencies, this does not guarantee the company's books are sound, but it is an added layer of oversight that can provide you with some protection. Most of the companies on our list have periodic audits which occur annually at a minimum. Some of them are audited more frequently. These are all positive things that you should want to see as an investor.
Note: Just to clarify, getting audited by a regulator or an independent third-party is different from being "audited" by the IRS as an individual. Being audited by a regulator or third-party is in many cases mandatory as a part of industry best practices and regulatory oversight. It does not mean that the company did anything incorrectly. Many industries require an annual audit for all firms.
How Many Clients Does Your Firm Provide Custody or Administrative Services For?
This question pertains to the size of the company you are considering. The firm's size can be measured in the number of accounts, number of clients, or assets held in custody (or assets being administered). The size of the firm can range from under $100 million in assets under administration or over $15 billion in assets held in custody.
All of these measurements can be used to measure the size of the company and how capable they are to service your requests. If a company has over 400,000 accounts and only has 2 service people, then they might be less capable of handling your requests than a company who has 1,000 accounts and only one service person. However, a large company might indicate the company is more successful due to its size. You would need to consider how each of these data points helps you better understand the company you are considering.
Does Your Company Have Any Industry Affiliations?
This will address how active the company is in their own industry and if the company has any financial bias (such as a subsidiary, or joint venture). Are they a part of organizations or trade groups? If so, in many cases these associations or trade groups will assist or advise them on best practices of handling industry problems.
For self-directed IRA custodians and administrators, Retirement Industry Trust Association (RITA) is the primary industry association. RITA does a lot to help with best practices on issues such as preventing fraud.
Alternative and Direct Investment Securities Association (ADISA) is another such association. ADISA's focus is more on alternative investments with broker-dealers, financial advisors, and investment sponsors. They also provide education to financial industry professionals.
While you might put some weight into this question, this would not cause me to change my decision at all. It is easy to pay money to be a part of an association. Personally, I find it more useful to get to the know the company and what is important to them.
What Does Your Company Charge For Fees?
What does your self directed IRA custodian charge for fees? #selfdirectediracustodian
It is important to consider the total costs you will have pay to implement a certain investment strategy. It is a fact that over time high fees reduce the net return to investors. However, all companies charge a fee, so you will have to compare one company to another to find the best solution for your investing needs. For example, if you are comparing a hedge fund that has an average return of 20% annually, charging 2% (net 18% return) to a S&P 500 index fund charging 0.12% with an annual return of 5% (net 4.88% return), then the net returns for the hedge fund would be the better investment.
You won't get an apples-to-apples comparison if you compare your stock index fund performance to the performance of your rental property. I only point this out because some investors despise fees even though it can ultimately benefit the investor by paying more. This can be the case for self-directed IRA custodians and administrators as well. If you have a $100,000 IRA and you are looking to set up and IRA at a broker-dealer, it might cost you $10 per trade. If you are not an active trader, this might cost you $100 or less for the entire year. This is the equivalent of 0.10% in costs.
If you use a self-directed IRA custodian or administrator, it might cost you $500 a year for your investment. The fee amounts will vary depending on how many transactions you engage in, whether you require wires, document storage, and other services. However using one of these companies might allow you to invest in an area that you are an expert in (such as horses, real estate, private equity, etc) and this could ultimately earn you more than you would potentially make in the stock market (where you may not be an expert).
While most of these companies on the surface will charge more for their services than a traditional broker, the net return is what is most important, not the fees. If you research what you expect to pay in fees for your investment strategy, you will find out whether a traditional custodian or self-directed IRA custodian is a better choice for you.
How Does Your Company Charge Their Fees?
The best way to look at their fee structures is to separate them into: Asset-based fees and Transaction-based fees.
Companies that charge asset-based fees will charge you a percentage of the assets you hold in your account at their firm. Many of these companies have a fee cap, so if you have $100 million IRA like Mitt Romney, you might only be charged $2,000 for the year. However if you have a smaller account size, the fee percentage might be a much larger percentage of the total amount.
Most companies on our list will charge a minimum fee regardless of whether you do any transactions or how much you hold at their firm. Companies which use asset-based fees all have a minimum fee that they charge, so if you want to open up a $1,000 IRA, then it may not make sense if the minimum fee is $300 a year. Some of these companies have quite a few accounts opened which are never invested or funded, yet they will still incur a fee for keeping the account open. Make sure you run a calculation on your expected fees to determine whether it makes sense to open this type of account.
Transaction-based fees are typically set up with a flat fee amount which is small and then for each transaction (buying a new investment, paying the electricity bill on your real estate, cashing a rent check), you will be charged a small fee. This is similar to the broker-dealer who charges a fixed amount for each stock trade you make in your account.
In addition to these two types of fee structures, there are hybrid fee models, per asset fees, and flat fees. These are not as common as the asset-based or transaction-based fee models, but they do exist for investors who find them to be a good fit. The hybrid fee models generally take some aspects of each and combine them to address a certain need.
Lastly, a few of the companies on our list provide investors with a choice of two or more fee models. This can be extremely helpful if you want to use one custodian or administrator and have different investment strategies that require different fee structures in different accounts.
Which fee structure is best for you?
We have created some tools to help you make these types of decisions in our Self Direct Your Retirement resources. One of the resources that is available to investors in this program is a fee calculator. Each company has a fee calculator associated with their fee schedule. You can use this calculator to estimate the fees you would pay by using a specific company. This will quickly help you make a determination about how the fee schedule will impact your investments.
What Account Types Do You Have Available?
Every company on our list of self-directed IRA custodians and administrators allows Traditional IRAs and Roth IRAs on their platform. But that is where the similarities end. Other account types such as SEP IRA, SIMPLE IRA, Solo K, Group 401(k), Defined benefit, ESOP, HSA, ESA, UTMA, non-qualified, Trust, and Corporate are available at some of these firms but not all.
If the company you are considering doesn't allow the type of account you need, then you will have to remove them from consideration.
What Types of Assets Will You Provide Custody Services?
The Internal Revenue Code (IRC) puts a few restrictions on what assets can be held in a self-directed IRA or 401k plan. Virtually any asset is allowed except for a few prohibited assets (e.g. life insurance, s-corps, and collectibles). While the Internal Revenue Code allows all other assets to be held in a retirement account, many custodians or administrators put additional restrictions on what assets are allowed to be held at their company. They have their own list of what is allowed to be held.
In no case will a custodian or administrator be able to offer custody for an asset that is not allowed by the Internal Revenue Code.
Every firm has their reasons for why they only allow certain assets. Some assets are harder to administer than others. Some companies want to specialize in order to speed up their efficiency. Other companies feel certain assets hold an increased liability for the custodian or administrator.
Many companies do not publish their entire list of allowable asset types. Therefore we have compiled a list of what each company allows for assets to be held at their firm in our Self Direct Your Retirement resources.
If the custodian or administrator does not hold the asset you are considering, just remove the company from your list and move on. We have been able to find a custodian or administrator to provide self-directed IRA services for every asset we could think of, but some assets had a limited number of companies willing to hold it.
Does Your Company Specialize in Certain Assets?
While it would be better to use a company that specializes in the asset type you want to invest in, it is not essential. If the company allows the asset type, then they will have some prior experience with that asset. If you want to invest in some asset that is not commonly held, like bitcoin, church bonds, or horses, then it might be hard to find a custodian or administrator who specializes in this area.
If it comes down to two companies, one that specializes and another one that does not, it might make your investing experience better to choose the specialist, otherwise, don't put too much thought into it.
Does Your Company Have Well-Run Operations?
This question is hard to get a reliable answer to, but important nonetheless. I certainly would not expect to get a straight answer from the company by asking this question directly.
In order to get some perspective, we have asked each company a number of questions pertaining to their operations to get a feel for how well run their company is.
We have certain criteria that is important to us when considering a self directed IRA custodian. Many of these criteria also happen to be good indicators about their operations. I want to highlight certain things which you should consider in your research
These are some questions you should ask about the company's operations
- How many employees does your company have?
- What are your company's procedures for investments that are suspected to be frauds?
- How do you protect client information?
- How do you handle annual valuations?
- What is your process of setting up a new account?
How Many Employees Do You Have On Your Client Service Team?
The number of people is less important than the ratio of service people to clients. Customer service is a large part of administering alternative investments. If you are buying a piece of real estate and need to meet a deadline for a closing, then you need the service team to be responsive. There are inevitable problems or changes that come up in many real estate deals. You want a service team that can manage these changing conditions.
We find that in many cases these delays can be attributed to investors not providing all the information and documents that are needed by the custodian, but you still need the service team to be ready to help.
Do You Have A Premier Client Service Team?
This may not be important to you as an individual investor. However, if you are a financial advisor, attorney, accountant, or custodian looking for a company to provide sub-custodial services to your client, then this will be very important. My company, Innovative Advisory Group, manages a number of clients' wealth management needs. When these needs are in the self-directed IRA investment space, we want a company who understand our needs as a firm. We need a designated person or team who understand how we do things to manage our service needs.
For example, if we are working on multiple investments for a specific client, we don't want to speak with a different customer service person each time we call in. It saves us time if we are speaking to a designated person each time who remembers our conversation rather than trying to decipher notes off a computer screen.
This is essential if you are a financial advisor or financial institution, but if you are an individual investor, this should not be important to you at all. Not all companies on our list have a premier service team. If you need a premier service team, look for the companies that have one in place.
What Technology Do You Have In Place To Protect Client Information?
The advancement of technology has made it easier to be more efficient with our tasks. Simple things like getting a summary of investments can easily be found on a website rather than calling the company or waiting for a paper statement. However, while these technological advancements make our lives easier, it also makes it easier for criminals to access your information.
You should want a company to prioritize the protection of your private information. You should want this company to have processes and procedures in place to protect your information. They should also have a plan in place in the event that your information is stolen.
Very few people discuss these issues with their self-directed IRA custodian or administrator. I would suggest having a conversation with your custodian to find out how your information is being protected. If they cannot give you a very specific answer, then you might want to consider a different company.
What Procedures Does Your Company Have In Place For Annual Valuations?
The IRS requires annual valuations for every asset held in a qualified plan (IRA, 401(k), etc). If you have only owned stocks or mutual funds in your IRA or 401(k) before, you might not be familiar with this requirement. Stocks are priced daily, so the requirement is met. However, if you own a horse in your self-directed IRA, then the IRS will want to know the value of the horse at least one time per year.
This is something that most investors are not aware of. You will need to know how your self-directed IRA custodian or administrator handles these annual requirements. Do they contact you to let you know that a valuation is due, or do they expect you to know about it yourself? If they don't contact you, you might forget or miss an important deadline that could put your IRA at risk. It is always better to work with a company that is proactive for ways to make sure you stay compliant with your IRA.
How Would You Characterize Your Company's Reputation?
It is likely that you will get the same answer from every company. If a company does not have a positive image, it is unlikely that they will point it out to you, so you will have to do your own research.
There are a few places you can look. You can search the company's website for press releases, the company's regulatory agency, the SEC, the OCC, or state regulator for press releases or other information about any negative infractions or cases that have come up. You can also look at the BBB website, Yelp , and other similar community forums for negative reviews.
You should note that just because the company's name comes up on regulator's website in a negative way, does not mean they are liable or at fault for the issue. Some issues may have the company's name attached to it, only because the assets were held by the custodian with no other involvement by that custodian.
In cases like this, it is common that the company had little or nothing to do with the existing case other than the assets were held there. In other cases where the company has potential liability, it may have more serious implications for the future of that company.
If you read these cases, it will be easy to determine whether the case is pertinent to the company's reputation or if it is just a minor infraction. Many of the larger news stories will have media coverage detailing how the company may or may not have been involved.
In addition to searching the company's reputation, you should also research the the company's principals or owners for their background and any signs of impropriety or fraud.
What Procedures Does Your Company Have In Place If An Investment Is Suspected To Be Fraudulent?
Fraudulent investments happen. Most of this is due to investors not completing a thorough due diligence process. The SEC, NASAA, RITA, ADISA, and many of these custodians individually warn investors about the potential for fraudulent investments. Despite their warnings, fraudulent investments still occur.
What you need to know is how the company would handle your account or investment if one of these investments happened to you. Do they put the entire burden on you to figure it out? Do they have a procedure in place to keep your IRA compliant? Do they provide you with resources so you can more easily navigate the process of handling a fraudulent investment?
... Or do they leave you stranded to figure it out on your own.
There are limitations as to how much they can help you since many of them cannot provide financial advice. However, there are resources available that they can provide you with. Ask them about the process of how they would handle a potentially fraudulent investment.
Are My Accounts Insured? What Type of Insurance is Provided? How Much Coverage Do You Have?
Most financial service firms have insurance protecting client accounts. This insurance mostly protects uninvested cash from loss in the event of failure of the firm holding the accounts. It will not protect the investment from a performance-based loss.
Your needs may be similar as if you were using a bank, since most of the custodians are banks. If a bank fails and your cash is FDIC insured, then the FDIC guarantees that you will get your cash back in an amount of up to $250,000. If you hold more than $250,000 in a FDIC insured bank, there is no guarantee that the amount over $250,000 will be returned.
Some financial firms carry additional insurance that covers amounts over $250,000. They can range from $1,000,000 to tens or hundreds of millions in insurance coverage.
If you have cash held in your IRA, then you should ask if the cash is FDIC insured, SPIC insured or another similar type of insurance coverage protecting your uninvested cash from loss. Typically, money market accounts do not qualify for this type of insurance since they are considered investments, not cash.
Having protection on your account is extremely important. This protection should (at minimum) cover the cash you expect to have in your account at any point in time.
What is The Average Turnaround Time For Opening A New Account?
Opening a new account might seem to be an important task that needs to be done quickly, but it isn't. If your process is based on such a short timetable that this becomes important, then you might need to reconsider your investment strategy. You should not time your investing strategy to the opening of a new account.
Most of the companies on this list can have an account opened in 24-48 hours. However, this assumes that you as the investor have provided them with all the information they need to open the account.
What is The Average Turnaround Time For Investing In A New Asset?
When you have certain investment strategies that require time-sensitive processing of documents, you want your self-directed IRA custodian or administrator to be very responsive. Most of them claim to have a turnaround time of 24 hours or less. This is what you need as an investor.
If it takes a company any longer than 24 hours, you need to consider whether it makes sense to use them. The company might need more people on their service team, you might have a complex transaction, or the slow turnaround time might be symptomatic of other internal issues that require more effort to research on your part. If there is a consistent issue with turnaround time, it might be better to move on to the next company.
If you do not need a quick turnaround time for your investment strategy, then this will be of secondary importance.
How Can I Access My Accounts?
We live in the age of the internet. Every financial services company should provide their clients with online access to their accounts and provide quarterly statements. If the company does not provide these things online, then you should question the value the company puts on the client experience.
You should also ask whether the statements or online access is through the custodian or the administrator? While an administrator might put together a nice statement for you, you should request original statements from the custodian for your accounts. Ideally, you would want direct access to the custodian as it limits the potential for fraudulent activities by an administrator or third party.
Does Your Company Provide Financial Advice?
Most self-directed IRA custodians and administrators do not provide financial advice. Whether they provide advice or not, they should all disclose this on their website and marketing materials. While most of them do disclose this, frequently investors do not heed this disclaimer. They expect that the custodian or administrator should give them advice and they rely on it as such. I would highly suggest that if you need help with the process of setting up and investing your self-directed IRA into alternative investments, you should consult a licensed professional that specializes in this area.
If you are looking for tax advice, make sure your tax advisor is experienced in this type of investment strategy. Just because you have a tax advisor, doesn't mean he knows about self directed IRAs. Most of the tax advisors have never had experience working with a self directed IRA before. The same holds true for your legal or financial advisor. Many licensed professionals can provide you with advice, but you should try to work with one who has experience with self-directed IRAs. This advice is no different from asking a real estate attorney to give you estate planning advice. You can do it, but finding a specialist might be more prudent.
If you need to find a licensed professional to help you with tax, legal or financial advice pertaining to self-directed IRAs, we have a complete list of professionals that provide legal, tax or financial advice for self-directed IRAs or 401(k)s.
Does Your Company Provide Financial Education?
Most of the self-directed IRA custodians and administrators do provide some education to their clients and prospective clients. While this is intended to be for marketing purposes, this education can still be very helpful to an investor who is not aware of how self-directed IRAs work. This should not be a determining factor in your decision, but it is good to know that there are people at the company that can provide you with some general education if you need it.
If you want to learn more about self-directed IRAs or 401(k)s, we have many resources located on our website. We also hold periodic webinars as well, if you are interested in one of those webinars, please sign up for our email list and we will notify you the next time we host one involving self-directed IRAs.
How Transparent Is Your Company Compared To Your Peers?
This is one of the harder questions to answer. It is very hard to measure transparency, but we have found a solution for you. To solve this problem, we use the Self Direct Your Retirement Transparency Index to measure each company's level of transparency. We have found this to be a very important metric in our research.
As an investor, you should not expect a company to be 100% transparent. We have heard many different reasons as to why companies don't want to provide information to potential clients. Some of these reasons are valid and some of them are questionable. Either way, our algorithm takes into account many different factors to come up with a number representing how we view the company's transparency with their potential clients.
At the moment, the ratings range from as low as 13% up to the highest rating of 100%. We view any company with a rating above 80% to be an acceptable level of transparency.
Another part of transparency is disclosure. When we created the our list of self-directed IRA custodians and administrators, it took us a long time to determine what type of company each one should be categorized as. Some companies do not clearly state what they do. Are they an administrator? A custodian? A coordinator? A facilitator? Or an investment sponsor? This is actually one of the bigger problems in the self-directed IRA industry. Providing greater transparency with proper disclosures will help investors make better decisions.
Most of the companies on this list do provide disclosures about whether they are a custodian or administrator, but there are also other disclosures to consider.
Does Your Company Provide Financial Advice?
While most companies do state this, many clients mistake their help with advice. It is important the investors understand that self-directed IRA custodians and administrators do not provide financial advice unless it is explicitly stated.
Does your company sell financial products? Is your company affiliated with another company that sells financial products?
This is important because some companies will market that they can help you open a self-directed IRA, but they are really an investment sponsor trying to sell their investments. This is common with real estate.
You should consider keeping a separation between the company providing your custody or administrative services and the company selling you investments. If the relationship is fully disclosed and you understand the relationship, then it might be fine, just make sure you understand the relationship and any bias that may exist due to that relationship.
Make sure everything is disclosed. Legitimate companies will want to provide disclosures for their activities. This is what you should look for in a company, one that is transparent and provides disclosures.
How Would Your Rate Your Customer Service Related To Your Peers?
This question will most likely generate the same answer for every company you speak with.
"We are the best of all our peers."
Obviously, they are all promoting themselves as the best solution for your needs. However, you can satisfy your curiosity by asking questions that allude to whether they can provide you with a solid customer experience. Questions such as:
- What is the ratio of clients to customer service representatives?
- How do you handle certain issues such as suspected frauds (as discussed above)?
- How long is your turnaround time for opening an account or processing a transaction?
- What is your average wait (response) time when I call or contact your company?
- Is your company proactive about dealing with certain issues such as valuations (as discussed above)?
- Can I easily access my account information when I need it?
This question of rating the company's customer service is not easy to quantify, there is no one number or rating system that will give you the answer you need. The best thing you can do is ask all the right questions. You should also review forums or websites about self-directed IRAs to hear other people's opinions. They might only be opinions, but if you hear the same criticism from many people, then it might have some merit.
Do your research before you make a decision about what self-directed IRA custodian to use. Spend the time to find the company that is the best fit for your needs. Making a mistake by choosing the wrong one can be a costly and time-consuming endeavor. Put the time in before you make the decision and you will be happy you did.
This task of choosing the best self-directed IRA custodian or administrator is a challenging one, especially for people who are not experienced in using self-directed IRAs.
We have created a course for investors who are looking for a self-directed IRA custodian or administrator to address these common questions. It is called Self Direct Your Retirement. This resource will save your hours, days or weeks of your valuable time trying to figure out all the information you need to make the best decision about your self-directed retirement account. It will provide you with a road map of the ideal process you should follow from start to finish. It will explain self-directed IRA industry terminology in easy to follow language. And it will provide you with an insider's guide to all the information you want on each self-directed IRA custodian and administrator. If you want to learn more about self-directing your retirement, click here to take control of your future.
About Innovative Advisory Group: Innovative Advisory Group, LLC (IAG), an independent Registered Investment Advisory Firm, is bringing innovation to the wealth management industry by combining both traditional and alternative investments. IAG is unique in that they have an extensive understanding of the regulatory and financial considerations involved with alternative investments held in self directed IRAs and other retirement accounts. IAG advises clients on traditional investments, such as stocks, bonds, and mutual funds, as well as advising clients on alternative investments. IAG has a value-oriented approach to investing, which integrates specialized investment experience with extensive resources.
For more information, you can visit: www.innovativewealth.com
About the author: Kirk Chisholm is a Wealth Manager and Principal at Innovative Advisory Group. His roles at IAG are co-chair of the Investment Committee and Head of the Traditional Investment Risk Management Group. His background and areas of focus are portfolio management and investment analysis in both the traditional and alternative investment markets. He received a BA degree in Economics from Trinity College in Hartford, CT.
Disclaimer: This article is intended solely for informational purposes only, and in no manner intended to solicit any product or service. The opinions in this article are exclusively of the author(s) and may or may not reflect all those who are employed, either directly or indirectly or affiliated with Innovative Advisory Group, LLC.